20031229Comments.pdf

WELDON B. STUTZMAN
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 3283
HECE\VEO
F!LED
'lOfi3 DEC 29 Prl 3~ 21
. . (,- ,
~~ t;
~~~
0-/:' \.1
" I
""
ISS! JIlL. \,;:J III
Street Address for Express Mail:
472 W WASHINGTON
BOISE ID 83702-5983
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF IDAHO POWER COMPANY FOR AN
ACCOUNTING ORDER REGARDING
TREATMENT OF CERTAIN ASSET
RETIREMENT OBLIGATIONS.COMMENTS OF THE
COMMISSION STAFF
CASE NO. IPC-O3-
COMES NOW the Staff of the Idaho Public Utilities Commission, by and through its
Attorney of record, Weldon B. Stutzman, Deputy Attorney General, and in response to the
Notice of Application and Notice of Modified Procedure issued on December 3 2003 , submits
the following comments.
BACKGROUND
On September 26, 2003 , Idaho Power Company (Idaho Power, Company) filed an
Application seeking an accounting order authorizing the Company to record regulatory assets or
liabilities associated with implementation of Statement of Financial Accounting Standards
(SFAS) 143. According to the Application, SPAS 143 requires utilities to recognize and account
for certain asset retirement obligations in a manner different from the way Idaho Power has
traditionally recognized and accounted for such costs. Specifically, if a legally enforceable asset
retirement obligation (ARO) is deemed to exist an entity must measure and record the liability
STAFF COMMENTS DECEMBER 29, 2003
for the ARO on its books. The liability must be recorded at fair market value in the period in
which the liability is incurred. SFAS 143 also provides that if market prices are not available
estimates of fair value can be calculated by discounting the estimated cash flows associated with
the ARO to their present value at the date the liability is recorded. Idaho Power s Application
asks for an accounting order authorizing the Company to (1) record, as a regulatory asset or a
regulatory liability, the cumulative financial statement impact resulting from the Company
implementation of SF AS 143 , and (2) record on an ongoing basis, as a regulatory asset or a
regulatory liability, an amount equal to the difference between the annual SF AS 143 accretion
and depreciation expenses and the annual depreciation expenses based on Commission approved
depreciation rates and coal mine reclamation accruals. Idaho Power also requests confirmation
by the Commission that (1) asset removal costs, in the form of negative net salvage, are currently
accrued through annual depreciation expense which is recoverable in rates; (2) these costs are
based on estimates of the final removal costs; and (3) such costs are trued-up for ratemaking
purposes at the time the related assets are retired and the actual removal costs are determined.
DISCUSSION OF SFAS 143 AND IDAHO POWER'S APPLICATION
In June 2001 , the Financial Accounting Standards Board (FASB) issued SFAS 143
Accounting for Asset Retirement Obligations, effective for fiscal years beginning after June 15
2002. Idaho Power began implementing SF AS 143 in its 2003 fiscal year (January 1 , 2003
through December 31 , 2003).
The F ASB issued SF AS 143 to address the inconsistencies in accounting practices for
asset retirement obligations. F ASB noted that obligations that meet the definition of a liability
were not being recognized when incurred or the recognized liability was not consistently
measured or presented. Idaho Power is required to implement SFAS 143 in order to comply with
Generally Accepted Accounting Principles.
Historically, under the accounting method currently used by Idaho Power, the reasonable
cost of removing a tangible long-lived asset at retirement is included in the calculation of
depreciation rates and is recovered over the useful life of the asset. Because the cost of removal
is included in depreciation expense, it is included in the Company s revenue requirement. In its
Application, Idaho Power is not requesting any changes to its currently approved depreciation
rates or any change in the level of asset removal included in the Company s revenue requirement
through depreciation expense.
STAFF COMMENTS DECEMBER 29, 2003
SFAS 143 Asset Retirement Oblieations (AROs)
As noted in Idaho Power s Application, SFAS 143 requires entities to recognize and
account for certain asset retirement obligations in a manner different from the way Idaho Power
has traditionally recognized and accounted for such costs. Specifically, if a legally enforceable
asset retirement obligation (ARO) as defined by SFAS 143 1 is deemed to exist an entity must
measure and separately account and report the liability for the ARO (ARO Liability) on its
books. This recognizes the entire cost of removal up-front while in ratemaking the cost of
removal is included in depreciation expense over the life of the asset. The liability must be
recorded at fair market value in the period in which the liability is incurred. SFAS 143 also
provides that if market prices are not available, estimates of fair value can be calculated by
discounting (using a credit-adjusted, risk-free interest rate) the estimated cash flows associated
with the ARO to their present value at the date the liability is recorded. Idaho Power will use the
expected present value method to determine its ARO Liabilities and corresponding ARO Assets
(see next section re: ARO Assets). If a company has chosen to remove assets for reasons other
than legal obligations, then the future costs of removing those assets do not have to be
recognized under SFAS 143.
Idaho Power has determined that it will need to record AROs under SF AS 143 for certain
generation assets. The Company has also identified AROs for transmission and distribution
assets. However, the timing of those obligations is indeterminate and the liability cannot be
measured and recorded at this time according to Idaho Power s Application. Idaho Power states
that there are no AROs related to general plant assets. In addition, Idaho Power notes in its
Application that the Company has an equity investment in Bridger Coal Company, which has
AROs related to mining assets. Idaho Power follows the accounting prepared by PacifiCorp
(Bridger Coal Company s majority owner) for Bridger Coal Company.
Idaho Power s Application understated the ARO associated with the Boardman Plant
since a 10% markup for a third party to perform the asset removal was inadvertently excluded
from the calculation of the cumulative effect adjustment. This is an immaterial misstatement of
Idaho Power s AROs because Idaho Power s obligations related to Boardman are much smaller
1 According to SF AS 143
, "
it applies to legal obligations associated with the retirement of a tangible long-lived asset
that result from the acquisition, construction, or development and (or) the normal operation of a long-lived asset
except... for certain obligations of lessees. As used in this Statement, a legal obligation is an obligation that a party
is required to settle as a result of an existing or enacted law, statute, ordinance, or written or oral contract or by legal
construction of a contract under the doctrine of promissory estoppeL"
STAFF COMMENTS DECEMBER 29 , 2003
than those associated with the Bridger Plant. Staff expects any needed correction will be made
as Idaho Power evaluates the ongoing reasonableness of its ARO obligations for financial
statement presentation.
SFAS 143 ARO Assets. Depreciation and Accretion Expenses
Under SFAS 143, at the same time the ARO Liability is recorded, a corresponding and
equivalent Asset is also recorded on the entity s books as part of the cost ofthe associated
tangible asset. The ARO Asset is then depreciated over the life of the associated tangible asset.
In addition, a period-to-period increase in the carrying amount of the liability (accretion expense)
is added to the ARO Liability annually to account for the time value of money, so that at the time
of retirement the recorded ARO Liability will be sufficient to meet the legal obligation. Any
gain or loss when the actual liability is paid in the future will be recognized in the Company
accounting records. The Federal Energy Regulatory Commission, in Order No. 631 dated April
2003 from Docket No. RM02-000 specified that jurisdictional entities would.. . record the
depreciation of the asset retirement costs in account 403., Depreciation expense for asset
retirement costs, and the accretion of the liability for the asset retirement obligations in account
411., Accretion expense. Idaho Power s Exhibit 2 does not reflect entries to these accounts.
Instead, the Company has netted the entries for the depreciation and accretion expense with other
below-the-line operating expense accounts such as account 407., Regulatory Debits.
Cumulative Effect at Implementation Date
Upon initial implementation of SF AS 143 , entities must establish in their financial
statements all of the amounts that would have been recorded had the new requirements always
been in place. Idaho Power records this cumulative impact as transition entries. As part of these
transition entries, Idaho Power will reverse the costs already contained in its financial statements
for legally obligated removals. This is done so that the Company will not have two different
removal costs (costs required by SFAS 143 and costs required for ratemaking) included in its
financial statements. In addition to reversing the costs for legally obligated removals, Idaho
Power has also reversed from accumulated depreciation all removal costs whether they relate to
legal obligations or not and recorded these amounts as regulatory liabilities.
The initial implementation of SF AS 143 proposed by Idaho Power will create a
regulatory asset for the cumulative accretion of interest on the ARO liabilities and the cumulative
STAFF COMMENTS DECEMBER 29, 2003
depreciation of the ARO assets. Idaho Power s proposed implementation would also create a
regulatory liability to record the reversal of previously accrued removal costs from accumulated
depreciation. If the Commission authorizes the accounting order, the total net cumulative
adjustment at this time will be a regulatory liability.
Rate-Reeulated Entities. Reeulatorv Assets and Reeulatorv Liabilities
SF AS 143 applies to rate-regulated entities that meet the criteria for application ofF ASB
Statement No. 71 , Accounting for the Effects of Certain Types of Regulation. SFAS 143
recognizes that differences may exist between its requirements and the treatment of AROs for
regulatory purposes. SF AS 143 provides that a regulated entity subject to SF AS 71 recognize
differences between the two approaches as a regulatory asset or a regulatory liability as opposed
to a charge or credit to net income if the requirements of SF AS 71 are met. Idaho Power is
requesting such treatment. The regulatory asset or regulatory liability will be removed at the
time the related tangible long-lived asset is removed.
SUMMARY
SF AS 143 requires entities to separately account and report the liability for asset
retirement obligations, capitalize the asset retirement costs, charge earnings for the depreciation
of the asset and the accretion of the liability. Under SF AS 71, a public utility is permitted to
record a regulatory asset or regulatory liability for differences between SFAS 143 and regulatory
accounting for asset retirement obligations rather than recording such differences as a charge or
credit to net income.
The Company s proposed accounting treatment will use SFAS 143 for reporting on its
financial statements but retain its current methodology for ratemaking purposes. As a result
there should be no rate change, now or in the future, associated with the application ofthe
requested accounting treatment. Neither the SFAS 143 transition entries nor the annual
accounting entries will change the level of costs included in rates.
STAFF RECOMMENDATIONS
While Staff s review has identified inconsistencies in Idaho Power s Application, Staff
recommends approval for Idaho Power to record, as a regulatory asset or liability, the cumulative
financial statement impact resulting from the implementation of SF AS 143 , and to record the
STAFF COMMENTS DECEMBER 29, 2003
ongoing annual differences between the SF AS 143 depreciation and accretion expenses and the
annual depreciation expenses that are currently authorized by the Commission in depreciation
rates and reclamation accruals.
Staff also recommends that the Commission require in its accounting order that Idaho
Power file annually and as part of its rate case filings, all journal entries made under the
requirements of SF AS 143 , including documents supporting the determination of regulatory
assets and liabilities and related dollar amounts. Due to the nature of these entries, Staff will be
reviewing the underlying support for them during analyses of assets and depreciation. As a
result, Staff recommends that the Company maintain financial records associated with these
entries similar to the long-lived assets to which they relate.
Staff acknowledges that Idaho Power has a reasonable opportunity to recover prudently
incurred removal costs. Staff recommends that the reasonableness of differences between actual
and estimated costs should be addressed when those events occur. Staff recommends that no
further confirmation be included in the Commission s accounting order.
Because these new accounting entries will not change the level of the costs included in
rates, Staff is making no recommendation regarding the treatment of SF AS 143 Regulatory
Assets and Regulatory Liabilities in future rate cases. If the assets and liabilities have an
unanticipated affect on rates, then the ratemaking treatment should be determined at the time of a
rate case.
Respectively submitted this 2f1fk-- day of December 2003.
Weldon B. Stutzman
Deputy Attorney General
Technical Staff: Terri Carlock
Patricia Harms
WS:i:umisc/comments/ipceO3.11 wstcph
STAFF COMMENTS DECEMBER 29, 2003
CERTIFICATE OF SERVICE
HEREBY CERTIFY THAT I HAVE THIS 29th DAY OF DECEMBER 2003
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF,
CASE NO. IPC-03-, BY MAILING A COpy THEREOF, POSTAGE PREPAID, TO
THE FOLLOWING:
BARTON L KLINE
MONICA MOEN
IDAHO POWER COMPANY
PO BOX 70
BOISE, ID 83707-0070
JOHN R GALE
VICE PRESIDENT - REG AFFAIRS
IDAHO POWER COMPANY
PO BOX 70
BOISE, ID 83707-0070
~~~
CERTIFICATE OF SERVICE